Although decisively defeated by the Prussians at Königgrätz in 1866, the Austro-Hungarians had held their own well in northern Italy, defeating the Italians on land at Custozza and by sea – spectacularly – at Lissa. Nevertheless, at the resulting peace settlement of Nickolsburg the Empire had to give up Venetia with most of its coastline and its good harbours. Only Trieste remained, and even that was also coveted by the irridentist Italians. The small ports along the jagged coastline of Dalmatia would never amount to much more than harbours for a coastguard. So, initially the Imperial Austrian Navy was intended for little more than coastal defence with occasional raiding as the secondary purpose. But the growing regional nationalisms accompanied by the gradual arms-race of the late-19th Century changed this narrow view. Ironically, whilst Italy was still an active member of the Triple Alliance, Germany saw the Italian navy as the main challenge to France's in the Mediterranean. However, Triple Alliance partner or not, Italy was always seen as the Erzfeind by Austria-Hungary and it was with the Italian navy in mind that the Austro-Hungarian navy sought to compete in both size and strength.

The disparity in Italy's favour between both the number and size of the the heavier ships was due to relatively slow building rates, leading one contemporary commentator to observe that the greatest enemy faced by the K.u.K. Kriegsmarine was the government, both in Vienna and, particularly, Budapest – a remarkably accurate assessment. A consequence of the 1867 Ausgleich was a concerted effort to iron out differences between the stronger, more industrial Austrian economy and the less-developed, largely pastoral Hungarian economy. Peculiarities persisted, eg. the Hungarian Delegation could block expenditure unless a share of the work was done on Hungarian soil, creating, as it often would, an administrative nightmare. In naval matters this problem was further exacerbated by the insistence that part of any naval shipbuilding programmes was always allocated to a Hungarian shipyard. Ironically ... Hungary only boasted 4 kms of coastline.

The K.u.K. Kriegsmarine had no lack of technically competent designers and engineers, or of a dedicated officer corps. But it did lack both adequate funding from the central government and the nous to foresee possible future threats in the Mediterranean from not just the Italians but also the French – and possibly even the Serbs if they ever acquired a port in the southern Adriatic. In 1897 Admiral von Spaun became commander of both the Navy and the navy section of the K.u.K. Kriegsministerium, and tackled the problems as best he could. His successor, Admiral Graf Rudolf Montecuccoli, took office in 1904 and advanced the cause of the K.u.K. Kriegsmarine by exploiting the very active support for it from the Thronfolger. Having seen the benefits of having a strong navy that could project power across the seas during his grand World Tour in 1892-93 aboard the cruiser SMS Kaiserin Elisabeth, Franz Ferdinand was able to advocate a stronger K.u.K. Kriegsmarine. This attitude brought him the warmth and sympathy of Kaiser Wilhem II of Germany, who saw in this a strengthening of his alliance with Austria-Hungary; also, a powerful Austro-Hungarian navy could deal with the Italian and French navies in the Mediterranean, leaving the Hochseeflotte of Germany's Kaisermarine to contest Britain's Royal Navy in the Atlantic or the North Sea.

However, advocating a stronger navy with better ships was one thing. Actually achieving this without the funds was quite another. One of Montecuccoli's finest achievements was to engineer the defeat of a proposal to cut the naval budget by 50%. The highly respected Generalschiffbauingenieur Siegfried Popper was asked to come out of retirement to design the K.u.K. Kriegsmarine's first dreadnought battleships, the Tegetthoff class (also known as the Viribus Unitis class) after the celebrated Admiral Tegetthoff who vanquished the more powerful Italian Navy at the Battle of Lissa in 1866. Popper's first design was turned down by Montecuccoli on the grounds that it was too big and therefore unaffordable. The basic requirement was to build a counter to the first Italian dreadnought, the Dante Alighieri, armed with a dozen Skoda 12-inch guns in four triple turrets, so Popper's design matched this. However, the imposed cost limits were to result in too cramped a design with too little margin of stability; upon completion the new dreadnoughts were some 50-100 feet shorter than most contemporary foreign dreadnoughts, thus reducing their seaworthiness in anything heavier than medium-weather. With hindsight, it may have been better to reduce topweight by having superimposed twin turrets at shelter-deck level instead of the proposed triple turrets. Also, whilst the major foreign navies were taking the torpedo threat seriously, introducing longitudinal anti-torpedo bulkheads, Popper's design was deficient in internal subdivision – again with cost in mind – by clinging to the outmoded concept of a centreline bulkhead. To add to all the technical problems, the Hungarian Delegation refused to vote any credits unless one of the class of four was built at a Hungarian shipyard. Unfortunately, the only yard was Danubius at Fiume [now: Rijeka], suitable only for small craft and needing major expansion and modernization if the port were to be able to build anything as large as a 20,000-ton dreadnought. The delegations argued, squabbled and wasted valuable time. As a result the new ship, the Szent István (named after the patron-saint of the Apostolic Kingdom of Hungary, St. Stephen), was seriously delayed, not being commissioned until 13th December, 1915.

The Stabilimento Tecnico Triestino (STT) yard was short of orders, and was about to close down part of its facilities and lay-off skilled workers. Montecuccoli risked his political career to get the other three ships started – Viribus Unitis, Tegetthoff and Prinz Eugen (after the celebrated 18th Century Austrian commander). He argued the case for placing two dreadnought orders immediately to the government in Vienna, but despite Franz Ferdinand's urging, the delegations, as usual, delayed, fudged and deferred any decisions. Finally, Montecuccoli took the extreme step of ordering the two ships on his personal authority ... a decision which, fortunately for Montecuccoli, was ratified by the respective parliaments later.

Fortunately again for Montecuccoli, the Italians were equally slow in building their Dante Alighieri. Although the Italian ship was the first be designed with four triple turrets, SMS Viribus Unitis was commissioned on 5th December, 1912 – a month earlier than the Dante Alighieri – and thus accorded this technical 'honour.' Immediately, Franz Ferdinand patronized the flagship of the class, SMS Viribus Unitis, almost as his 'personal dreadnought.' Boys with big heavy toys ...! Ironically, in June 1914 the Viribus Unitis would take him down the Dalmatian coast toward his rendezvous with Destiny. And the ship would take both his and his wife's bodies back to Trieste several days later. Perhaps this tragic duty made the ship somehow cursed: none of the Tegetthoff-class battleships – nor the Italians' dreadnoughts, for that matter – would enjoy an illustrious career; the war in the Adriatic would be left more to the destroyers, torpedoboats and submarines.

In 1913 Franz Ferdinand became Inspector-General of all Armed Forces. The post carried with it the honourary rank of Admiral, thus enabling him to exert more direct influence on naval matters. The building programme of submarines and torpedo-gunboats was stepped-up as funds were available for these 'lesser' projects. In March Franz Ferdinand urged the new C.-in-C. of the K.u.K. Kriegsmarine, Admiral Haus, to order the four new 'improved Tegetthoff class' dreadnoughts, of 24,500 tons and ten 13.8-inch guns in a 2x2 and 2x3 layout, as the STT and Danubius yards urgently needed follow-up orders. But the Hungarian Delegation stubbornly refused to allow anymore construction on credit, arguing that funds should come from the 1914-15 budget. Even the Emperor in person could not persuade the Hungarian Ministry of Finance to acquiesce, resulting in a full year's delay in dreadnought construction. Nevertheless, as part of the carrot and stick policy to browbeat Serbia, the Minister of War, Baron von Krobatin, was instructed to announce that four such dreadnoughts would be built at a cost of 106 million Kroner each. On that occasion the ploy seemed to work: Serbian Prime Minister Nikola Pašic visited Vienna with the promise that Serbia would not invade/occupy Albania. This was fortunate, for the 1914-15 budget – including the four new dreadnought battleships – was not approved until 28th May, 1914. At the end of June STT was ordered to lay down the keel for 'Ship VIII' on 1st July, and Danubius was ordered to lay down 'Ship IX' on 1st January, 1915. But following the assassination of Franz Ferdinand, and with it the outbreak of the war, the keel-layings were postponed, and then the projects cancelled altogether.